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1
Frontier Battery Development
for Hybrid Vehicles
Heather Lewis Marion Paolini
Dani Park Matthew Streit
Alan Tsui
Energy & Energy Policy December 2, 2009
2
Table of Contents 1. Introduction.............................................................................................................................3 2. Battery technologies................................................................................................................4 3. Environmental costs, issues, limitations...................................................................................7 4. Energy policy frontiers..........................................................................................................12 5. Future prospects for battery technology.................................................................................15 6. Cost-benefit analysis of cars – gasoline versus hybrid............................................................18 7. Conclusion ............................................................................................................................23 Appendix A: Economic Model ..................................................................................................33 Appendix B: Nominal Parameters for 1 Amphour Secondary Batteries .....................................34 References ................................................................................................................................35
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1. Introduction
America is an automobile-oriented nation. In 2007, Americans owned more than 237
million passenger vehicles.1 Since the advent of the interstate highway system, the number of
passenger vehicles in the U.S. has been continuously growing, and the number of vehicles has
exceeded the number of registered drivers since 1972.2 Though fuel economy has improved by
almost 40% since 1960, these improvements have not been enough to keep pace with the sheer
number of passenger vehicles, which has more than doubled in the last 60 years.3 An
increasingly negative view toward the U.S. foreign oil dependency and environmental concerns
has been pushing interest in electric and hybrid-electric vehicles. In 2007, passenger vehicles
were responsible for 1,600 MMT of CO2 emissions, or more than one-quarter of the total CO2
emissions for the US.4
Consequently, many efforts to reduce U.S. greenhouse gas emissions have centered
around reducing emissions from passenger vehicles. Hybrid vehicles are at the forefront of these
reduction efforts. Hybrid electric vehicles (HEVs) combine a traditional internal combustion
engine with an electric motor and a battery pack, and can reach a fuel economy of 50 miles per
gallon (nearly triple the current average miles traveled per gallon for passenger vehicles). There
are a few production HEVs that are currently available to consumers, including the Toyota Prius,
the Honda Insight and the Honda Civic Hybrid. Plug-in hybrid electric vehicles (PHEVs) have
the same components as HEVs, but additionally can be plugged in to an external electric power
source to recharge the batteries. PHEVs are far less common on the roads than HEVs, although
General Motors, Toyota, Volkswagen, Volvo and Ford all have plans to release PHEVs in the
1 U.S. DOT 2009, Table 1-11. Passenger vehicles include passenger cars and other 2-axle, 4-tire vehicles. 2 Federal Highway Administration 2009, 6.3.1. 3 U.S. DOT 2009, Table 4-9. Average miles traveled per gallon increased from 12.4 in 1960 to 17.2 in 2007. 4 U.S. DOT 2009, Table 4-9, U.S. EPA Report No. 420-F-05-001, and U.S. DOE Report No. #: DOE/EIA-057.
Total U.S.CO2 emissions in 2007 were 6,022 MMT.
4
next three years. This report will focus on the more widely-available HEVs, which are currently
better situated to become cost competitive with traditional gasoline-powered cars.
Though HEVs are becoming more common in the commercial vehicle fleet, there is a
significant price premium on hybrid vehicles over similar gasoline-powered vehicles. One of the
primary drivers of this “hybrid premium” is the cost of the vehicles’ batteries. This paper will
focus on these batteries used in hybrid vehicles. This paper will examine the types of batteries
used for transportation applications and address some of the technological and political barriers
to further battery development and deployment in HEVs. Ultimately, this paper will examine the
claim, often voiced by HEV proponents, that taking into account savings on gasoline and vehicle
maintenance, hybrid cars are cheaper than traditional gasoline cars. A benefit-cost analysis will
show that, taking account of all costs for the life of the vehicle, hybrid cars are in fact more
expensive than gasoline-powered vehicles; however, after five years HEVs will break even with
gasoline cars.
2. Battery technologies
The principles upon which batteries operate were established in the 1800s, but the
demand for more efficient and higher capacity batteries has continued to outpace the
development of batteries themselves. There are a significant number of limitations of batteries
that make them difficult to use in cars, and a large part of the potential for battery-powered
vehicles is based on the possibility of improvements in battery technology.
In order to understand the limitations of battery development it is important to understand
how batteries work. The basic chemical process in batteries has not changed significantly over
the past 200 years. Batteries’ primarily function is to convert chemical energy into a direct
current for use in electrical applications. This is accomplished by a reaction between two
5
electrodes connected by an electrolyte in a cell. Through reduction and oxidation, electrons are
transferred across the electrolyte from one electrode to another, and a current and voltage is
produced. Several of these cells are linked together to form a battery. The materials that make
up the electrode and the electrolyte differ depending on the battery, but this chemical reaction is
the basis of all currently widely used batteries. The materials used in designing a battery place
limits on the maximum energy and power that can be drawn, and additionally affect the charging
cycle.
The amount of energy available in a battery is measured in several ways. The charge of a
battery is given out in Amphours, or how many amps per hour can flow from a battery. The
capacity of a given battery is usually defined as C. (A battery with a 30 Amphour capacity means
C=30.) Another measure of a battery’s energy is the specific energy defined as Wh/kg. This is
the amount of energy available relative to the weight. Related is the energy density, which is the
amount of energy in relation to volume (Wh/L). All of these ratings are important in determining
the physical size of a given battery type needed for a given application.
Unfortunately, these parameters can only be defined nominally in most instances.
Changes in the temperature and discharge rate greatly affect the energy available to use. This is
because of unwanted side reactions that do not transfer the energy in the chemical bonds into
useable electricity. When a battery has been discharged significantly, usually below 20%, the
efficiency of the reactions sharply decreases as well.
Unwanted reactions also occur spontaneously when the battery is not in use. This leads
to what is termed self-discharge. Different batteries have different rates of self-discharge and
this has a significant impact on the viability of a battery for use in applications where the battery
will go a long time between uses, as is common in private vehicles. This self-discharge also has
6
an impact on recharging efficiency. Though the current across cells while the battery is in use is
equal, the self-discharge rate differs because of variance in manufacturing and in temperature
across the cells. Some cells discharge at a higher rate than other cells in the battery. Similarly,
as the battery is recharged, come cells become “full” before the others. When this happens, these
cells must be “over-charged” until charge equalization occurs and all the cells are “full”. This
equalization has to occur at a much slower rate than the initial charging in order to avoid
damaging the battery and to prevent fire or explosion. The slower rate makes it difficult to
quickly recharge batteries to their full capacity.
Currently there are three types of batteries that are used in vehicles. These are Lead-
Acid, Nickel Metal Hydride (NiMH) and Lithium Ion (Li-ion) batteries. Nearly all hybrid
electric vehicles in production today use NiMH batteries, because they offer the best compromise
between energy capacity, size and price, with a specific energy of around 65Wh/kg.5 NiMH
batteries also have a fairly rapid recharge time, which is useful for regenerative braking;
however, these batteries also have a relatively high self-discharge rate. Lead Acid batteries are
cheaper but they provide significantly less energy (20Wh/kg) and have a much longer recharge
time, which makes them much less attractive for consumer vehicle use. Li-ion has the highest
specific power, energy and energy density of the three battery types, and additionally has a very
low self-discharge rate. However, these batteries are prohibitively expensive at large sizes, and
currently only one production vehicle, the all-electric Tesla Roadster, which has a base price of
around $100,000, uses Li-ion batteries. Significantly, gasoline has a specific energy of
12kWh/kg; even assuming an internal combustion engine that achieves only 20% efficiency, the
total specific energy of such a system is still twice as much as Lithium Ion batteries (90Wh/kg)6.
5 These parameters assume a nominal 1 Amphour battery 6 Parameters from Larminie 2003
7
3. Negative externalities of battery production
There are a number of positive externalities associated with driving hybrid cars instead
gasoline cars, including reduced greenhouse gas emissions, reduced air pollution and reduced
dependence on foreign oil. These externalities have been discussed elsewhere at great length, so
we will not engage in an in-depth discussion of them here. We will instead focus on the less-
discussed negative externalities associated with the production of batteries for hybrid cars.
3.1. Issues raised by the production of batteries
The production process is often forgotten in the carbon emission calculation for “clean”
energy production or transportation. Indeed, as far as batteries are concerned, the production
process itself is very energy consuming and polluting. To give an idea of the scale of energy
involved, the production process uses more energy than the batteries are ever going to stock and
return during their use. To make 1Wh of capacity in lithium battery, 1.2MJ are needed. To
produce the lithium needed, between 0.31MJ and 0.67MJ is used depending on whether the
lithium recycled or not. Since a car battery has to have a capacity of about 30KWh, the total
energy consumed during production is 56.1GJ.
Moreover, this process is polluting. The U.S. Bureau of Mines estimates that 8 tons of
sulphur are produced and emitted for each ton of nickel. Lead compounds, such as oxides, are
released as particulates during both primary and secondary (recycling) lead smelting operations
and during battery manufacture and recycling.
The other issue raised by the production process is the need for natural resources. The
outlook for nickel and lithium are outlined below.
The major deposits of nickel are in Canada, Russia, Brazil and China. These are countries
that already have major resources, such as oil and gas. Consequently, using nickel instead of
8
gasoline to power vehicles would not substantially change the economic and power equilibriums.
A shift to nickel would lessen the dependence on Middle East countries for oil, but it would not
create a dramatic shift in which countries currently have natural resources that are considered
valuable. Another issue presented by the use of nickel batteries is the competition from stainless
steel. Currently around 60% of nickel is used for this purpose (see Figure 1).
Figure 1. Nickel First Use7
For lithium, the situation is different. Lithium is a very abundant element (the 33rd most
abundant) but there are not many places on earth where it is concentrated enough to make mining
viable (see Figure 2). There are major deposits in Bolivia, Chile, China and Argentina, countries
that are not considered important for oil. As a result, the use lithium instead of gasoline for cars
would substantially modify the economic equilibrium. For this reason, some developed countries
have tried to maintain the use of nickel technology instead of lithium, even when there is a huge
demand for nickel for other purposes besides battery production. Additionally, the overall
demand for lithium is rapidly increasing (see Figure 3), and as a result its market price has
increased by a factor of ten in five years.
7 Nickel Institute. 2007. Nickel & its Uses. http://www.nickelinstitute.org/index.cfm?ci_id=13&la_id=1
9
Figure 2. World Lithium Resources8
Figure 3 Lithium Consumption by End-Use 2002-20209
8 Evans, K. 2008. http://a7.idata.over-blog.com/1/23/41/67/Energie/g-copie-1.jpg 9 Tischendorf 2009.
10
Figure 4. Battery Market Booms10
Lithium and nickel demands are
increasing, and rocketing demand for
batteries (see Figure 4) will only make
the situation worse. Battery vehicles do
not mean the end of resource
dependence, but instead a shift in which
resources are important. Other
countries’ resources and external price
fluctuations will still be necessary to power automobiles.
3.2. Issues raised by the destruction of batteries
Let’s take the example of nickel and lithium again. Lithium reacts with nitrogen, oxygen
and steam to form a mix of lithium hydroxide, lithium carbonate and lithium nitride. Lithium
hydroxide is very corrosive and can cause skin burns and pulmonary edema. For nickel, the
problem is similar. Nickel in contact with nitrogen, oxygen or steam produces potassium
hydroxide which is very dangerous. Nickel-based batteries can endanger aquatic life since non-
recycled batteries are often just thrown into the ocean. In the U.S. the recycling rate is around
95% (96% for Lead Acid Batteries).
There is a need for recycling infrastructure and incentives. There are several issues raised
by the recycling process. First, the entirely of the battery cannot be recycled. For lithium ion
batteries, 90-98% of the material can be recycled. While this constitutes a large portion of the
battery, there is still the question of what to do with the remaining 2-10%.
10 Penny Sleuth. 2008.
11
Another issues lies in the assignment of responsibility for recycling. Currently,
regulations tend to make the producer responsible for the recycling process. For instance, the
Toyota Prius and Honda Civic are equipped with Panasonic batteries. When a battery is not
working, it is sent back to Panasonic’s plants in Japan and Panasonic takes care of the recycling.
The recycled materials are used to manufacture new batteries. Companies to whom the batteries
are sent back either dilute them in their stock, which isn’t polluting, or burn them. In the absence
of government regulations, if the recycling process is not carried out properly, it can be very
polluting.
New recycling methods have been implemented, but remain expensive. Thus, for the
recycling process to be efficient, it should be centralized. This is currently the case in Illinois
where the public service RBRC, with its Call2Recycle program, centralizes the recuperation of
batteries and sends them to three recycling centers on the continent. This program is not
completely free of problems because the batteries have to be transported, which results in
greenhouse gas emissions. Additionally, accidents during the transportation process could result
in a spill of toxic components of the batteries. Consequently, there are still a number of issues
surrounding the recycling of HEV batteries.
12
4. Energy policy frontiers
There are two major goals that can be achieved by policy changes and implementation
regarding battery fuel energy. One is to reduce our dependence on oil, and especially on foreign
oil imports from the Persian Gulf. The second is to reduce carbon dioxide emissions by using
less oil and more battery fuel energy. To achieve these goals, there are both domestic and foreign
policies that could encourage progress.
On the domestic side, there is very little that is currently being implemented to
aggressively encourage battery energy advancement. Peter Fontaine writes in The Electricity
Journal that the government should aggressively encourage battery fuel advancement via
provision of tax benefits for using battery fuel, and creation of more funds and monetary awards
for companies that advance battery technology.11 Tax credits are, in fact, currently being given
for hybrid car users; the Energy Policy Act of 2005 included a provision for tax credits ranging
from $250 to $3,400 per vehicle, in effect from January 2006 through December 2009. 12
However, there is a limit of approximately 60,000 vehicles per manufacturer that can qualify for
this tax credit. Salvatore Lazzari, a specialist in public finance resources, science and industry
division writing for the congress, explains that this limit was instituted in order to limit the
benefits accrued due to imported hybrid vehicles, which currently outnumber domestically
manufactured hybrid vehicles in the market.13
Although this limit serves a protective purpose for the domestic market, Fontaine insists
that the government should do more. Fontaine argues that it is necessary for the government to
more aggressively promote battery fuel so that it can effectively penetrate the current oil-
dominated energy market, and encourage CO2 emission reduction practices such as cap and trade
11 Fontaine 2008. 12 Lazzari 2006. 13 Ibid., pg. 1.
13
CO2 emissions trading.14 Fontaine’s concern is validated when we look at current energy
policies; despite the inclusion of battery fuel advancement in the American Clean Energy and
Security Act, battery fuel is not included as a standard in the Clean Air Act Renewable Fuels
Standard.15 However, cap and trade programs have been practiced on a smaller scale, providing
hope that a program could be implemented in a wider region in the future.
There are several implications to the proposed approaches to promoting battery
development. Mainly, as Rene Kemp, Johan Schot and Remco Hoogma explain in Regime Shifts
to Sustainability Through Processes of Niche Formation, the dominant energy regime is difficult
to diminish because the oil industry is locked into its niche market. The oil establishment has
been solidified over decades of industry prominence and it is resistant to regime change despite
aggressive government policy implementations.16 In addition, the oil industry lobbies for its
interests to stay relevant and predominant in the market. Therefore, the government would face
strong opposition from oil firms, rendering it difficult to push through significant changes in
battery fuel development and implementation.
On the foreign policy side, there are several essential goals that can be achieved through
pro-battery policy: reduction of our national dependence on foreign oil and a simultaneous
reduction in the oil market’s economic activity on the international level, as well as a reduction
in the military costs of protecting key oil-related regions such as the Persian Gulf and the Strait
of Malacca. These goals are also importantly related to foreign policy goals such as reducing
tension between China and the U.S. over the Saudi Arabian oil market, and reducing arms trade
towards Saudi Arabia for the amelioration of oil trade between it and key states such as the U.S.
and China.
14 Fontaine 2008, pg. 26. 15 Ibid. pg. 24. 16 Kemp et al. 1998.
14
Achieving these goals allows for a multitude of benefits that would relieve many costly
and longstanding international crises. For one, protecting the Persian Gulf and securing sea trade
routes for oil such as the Strait of Malacca costs around $70 to $100 billion per year.17 Reducing
dependence on oil would not only relieve the U.S. of this costly burden, but it would also reduce
the need for continued U.S. involvement, both diplomatic and militaristic, in the region. At this
point, both the U.S. and China import oil from Saudi Arabia, and this causes tension between the
three states. If both importing states grew less dependent on oil, this tension would dissipate and
the U.S. would have less need to supply Saudi Arabia with arms deals that are primarily serve to
appease the oil market with preferential treatment.
Although the U.S. has much to gain from achieving these goals, there are a number of
difficult political hurdles. For one, it would be partially beneficial to encourage a race towards
battery technology enhancement between the U.S. and China. This would also encourage China
to be more energy-independent and consequently less dependent on Saudi Arabia. However,
international energy crisis researchers such as Michael Klare suggest that alternative fuels will
not actively advance unless they soon become more profitable to pursue than the preexisting
energy mainstays.18 In addition, it is unclear how soon the U.S. would be able to withdraw from
its Persian Gulf involvement even if alternative energy forms were to relieve the need for oil; just
as the oil industry is solidly established and resistant to regime change, the U.S. involvement in
the Persian Gulf has become entrenched. With the many political and military involvements that
have conspired between the U.S. and the Middle East since the 1980s, the U.S. cannot easily
withdraw its involvement quickly while the Middle Eastern states remain unstable. Though the
17 Klare 2002. 18 Klare 2005.
15
U.S. has much to gain from improvements in battery technology, there are still some obstacles
that stand in the way of the achievement of these goals.
5. Future prospects for battery technology
Lithium-ion batteries are the future of car batteries. As discussed earlier, Li-ion batteries
have better specific power, energy and energy density than lead acid and NiMH batteries, along
with a very low self-discharge rate (see Appendix B). These characteristics make them the best
choice for use in vehicles; however, there are still a number of limitations that have prevented
car manufacturers from adopting Li-ion batteries. These limitations explain why there is
currently only one commercially available vehicle that uses Li-ion batteries, the all-electric Tesla
Roadster sports car, which, at a base price of over $100,000, is more of a specialty car than a
replacement for the average internal combustion passenger vehicle.
Though Li-ion batteries have been widely used in laptops, cell phones and other
consumer electronics, batteries of the size necessary to power an automobile face a number of
limitations. These limitations can be summed up in four categories: safety, cost, life, and
performance over a wide temperature range. Safety concerns are primarily centered on thermal
runaway. Thermal runaway is a positive feedback mechanism that results in overheating, and can
ultimately cause sealed-cell batteries to explode. The costs of Li-ion batteries for vehicles are
currently prohibitively high, as is apparent from the price of the Tesla Roadster. Additionally, Li-
ion batteries need to have a longer life if they are to be used in vehicles. Every time that a Li-ion
battery is recharged, deposits form in the electrolyte that inhibit lithium ion transport, which
decreases the capacity of the cell. This means that as Li-ion batteries age, they are able to hold
less charge. Finally, the poor performance of Li-ion batteries at temperatures below freezing
limits the widespread deployment of these batteries.
16
The majority of current research efforts into the future of Li-ion batteries have been
undertaken by government agencies or with government support. The principal government
research program is the Vehicle Technologies Program (VTP), housed within the Department of
Energy’s Office of Energy Efficiency and Renewable Energy. VTP is a collaborative research
initiative that aims to develop advanced transportation technologies that would improve vehicle
fuel efficiency and reduce petroleum dependence, helping the U.S. to achieve transportation
energy security. The Program’s budget for financial year 2009 was $273 million, and an
additional $60 million has been requested for FY 2010.19 VTP has five major strategic areas:
vehicle electrification, high-efficiency engines, advanced lightweight materials, fuels and
lubricants, and deployment and education. Vehicle electrification efforts involve research into
lowering battery cost while increasing battery performance and life. VTP collaborators include
industry leaders, national laboratories, universities, and state and local governments.
One of the industry partners in the VTP program is the U.S. Council for Automotive
Research (USCAR), which includes Chrysler Corporation, Ford Motor Company and General
Motors Corporation. USCAR and DOE have established two specific goals for battery
technologies: to reduce battery cost to $20/kW and extend calendar life to 15 years.20 Argonne
National Laboratory is another VTP partner working to meet these goals. Argonne Lab, located
outside of Chicago, hosts the Transportation Technology R&D Center, which is leading DOE’s
R&D program on Li-ion batteries for transportation applications, and addressing the limitations
of Li-ion batteries. Argonne is working to improve the safety of Li-ion batteries by examining
the thermal properties of the battery materials and other components, and experimenting with
new electrode materials that produce less heat, as well as electrolyte additives that retard
19 U.S. Department of Energy, Office of Renewable Energy and Energy Efficiency. Fiscal Year 2010 Budget-in-
Brief, pg. 62 20 USCAR. Electrochemical Energy Storage Tech Team. http://www.uscar.org/guest/view_team.php?teams_id=11
17
flammability within the cells. In order to reduce battery costs, Argonne researchers have
developed software tools that can be used to design Li-ion batteries for transportation
applications. Taking into account the materials used to make the battery and the production rate,
these tools are then used to estimate battery costs, without needing to actually construct the
battery prototype. Argonne Lab is also working to improve the calendar life of batteries by using
advanced diagnostic techniques to conduct accelerated cell aging studies. These studies allow
scientists to better understand the mechanisms that affect power and capacity loss over time, and
to develop more stable materials for batteries that improve life. These same diagnostic modeling
studies also allow researchers to determine causes of poor battery performance at low
temperatures.
Aside from the Vehicle Technologies Program, the federal government has also
supported the development of vehicle batteries through legislation, most recently through the
American Recovery and Reinvestment Act of 2009. The Recovery Act designated $2.4 billion
for domestic manufacturing of automobile batteries and related components. From these funds,
$250 million was granted to A123 systems, one of the few American Li-ion battery makers, to
build a Li-ion battery factory in Michigan.
18
6. Cost-benefit analysis of cars – gasoline versus hybrid.
6.1 Scope
Aside from putting forth an argument for environmental friendliness, car salesmen and
corporate executives in the business of selling hybrid electric vehicles have claimed that after
taking into account all costs throughout the life of the vehicle, it is more economical to own
hybrid cars than gasoline cars. Some of these individuals have gone so far as to attempt to show
this quantitatively by adding up the future costs of both types of cars.
Although many people may believe in the numbers they are shown by car salesmen, the
numbers themselves are essentially meaningless calculations unless the future costs are
discounted to their present values.
To illustrate this more clearly, we will take a hypothetical example with two periods. Car
A costs 100 and car B costs 140 in period one. In period two, the cost of maintaining car A is 50
whereas car B has no maintenance costs.
By simple math, similar to what car salesmen use to “prove” that hybrid cars are cheaper
than gasoline cars, car A costs a total of 150 and car B costs a total of 140. Hence, car A is more
expensive than car B.
However true this may be true in a hypothetical world without financial markets and
opportunity costs, but it is definitely false in the real world. Continuing from the above example,
we will add in the option for the buyer to either buy one of the two cars, or he put his money in
the bank with a 30% interest rate. This means that although a buyer purchasing car A is obligated
to pay 50 in the future, the interest returns from the bank means in order to buy the car in the
future, the buyer only has to have about 38 in the present, because that 38 will be worth 50 in
period two.
19
Taking into account the 30% rate of return by the bank in this example, the present costs
when the car is purchased in period one is 138 for car A and 140 for car B, which shows that car
A is cheaper when costs are calculated with correct quantitative analysis. Using a simple
example with two extra variables – time and a rate of return – already yields completely different
results. By the same token, the simple math used by car salesman to show that hybrid cars are
cheaper than gasoline cars deviates far from the reality of many more time periods and cost
variables, which leads us to the two questions this case study attempts to answer:
(1) Are the simple math calculations used by car salesmen a marketing gimmick?
(2) Do the economic benefits outweigh the costs for hybrid cars?
6.2 Setup Figure 5. The Honda Civic
To achieve an analysis with significant
results, we first narrowed the scope of our study in
order to prevent making farfetched assumptions.
Our study will focus on the United States as the
geographic region, because of the abundance of
economic data available. The timeframe of our
study will be 5 years (14 years taking into account future costs). As with all models, a longer
time frame allows more future uncertainties. Furthermore, 14 years of data can successfully
answer the two main questions of our study. Our study will focus on the Honda Civic (Figure 5).
The Honda Civic is currently and has historically been one of the most popular cars in the world,
but more importantly it has both a gasoline and hybrid model. Although not all specifications for
the two versions are exactly the same, this is the closest comparison available to allow for a fair
test.
20
To quantitatively set up the cost-benefit analysis, we start from the “with versus without”
principle – the “with” being hybrid and the “without” being gasoline cars. Since we know the
costs for the consumer, the goal is to minimize costs.
The logic can be summarized as follows:
• With (hybrid) versus without (gasoline) => New state (hybrid) versus original state (gasoline)
• Goal – Minimize cost => Cost of new state < Cost of original state => (Cost of original state) - (Cost of new state) > 0 => (Cost of gasoline) - (Cost of hybrid) > 0
• Calculate – Net = (CG) – (CH)
As long as the net is positive, this means hybrid cars are lower in cost and carry positive
economic benefits.
Note that our cost-benefit analysis will not quantitatively consider the distribution of
benefits but focus on total size of the benefits to society. This point will be revisited and further
elaborated in the next section.
6.3 Assumptions
The five main assumptions of the cost-benefit analysis model in this case study are as follows:
i) Consumer habits –
• Previous studies have estimated that American consumers purchase new cars every 8 to
10 years on average. We will assume this to be 10 years, which is on the higher end, for
two main reasons. First, the recent economic crisis has increased savings and decreased
the marginal propensity to consume for the average American. Secondly, technology
tends to extend the lifespan of most goods.
21
• Previous studies also show that the average number of miles driven per year on every
American car is 12,000 to 15,000 miles on average. For our model, we will assume the
median of this range, 13,500 miles.
ii) Producer habits –
• As previously discussed, we are focusing on the increase in net benefits to the whole of
society (i.e. the total size of the pie) rather than distribution of these benefits. Hence, we
will assume that the profit margins expressed in percentages for both the gasoline and
hybrid car are equal. If profit margins are not assumed to be equal, firms will essentially
subsidize the initial purchase price of the car selling at a lower profit margin. Since (total
utility to society) = (producer surplus + consumer surplus), an erosion of firms’ profits
equates to a payment transfer from producer to consumer rather than an increase in
overall value to society.
• Although this assumption may seem unrealistic, which is definitely true if one analyzes
margins on a single year basis, taking the average of the purchase prices and costs of
production over the years for each vehicle, and then calculating the profit margins should
yield almost identical results. Historically the profit margins for hybrid vehicles have
indeed been lower than gasoline cars, but looking forward, this trend is likely to be
reversed, as Japanese car manufacturers project that by 2020, they will be able to cut
costs of hybrid cars by up to 67%. At the same time, Toyota has claimed that absolute
profit margins for their hybrid cars should be equal to gasoline cars from 2010 onwards.
Toyota has further claimed that they will be selling 100% hybrid cars by 2020. Since
hybrid cars entered the market in a profound way around year 2000, our model, which
calculates its values from 2010 onwards, should be in the middle transition period where
22
hybrid vehicles’ profit margins are approaching and surpassing those of gasoline
vehicles. This implies that our profit margin assumption is reasonable.
iii) Discount rate –
• Our model will use a discount rate of 7%, the suggested private sector rate of return for
models projecting less than 25 years by Professor George Tolley (Economics
Department, University of Chicago). As a majority of the firms pioneering hybrid
vehicles are extremely profitable and innovative companies, using the private sector rate
of return is a more accurate assumption than a risk-free rate of return.
iv) Gasoline prices –
• We have applied linear regression analysis to gasoline prices from 1990 onwards to yield
the following trends and regression equations:
Figure 5. Week (1990 onwards) vs. Cents per gallon
23
Figure 6. Gasoline Prices ($/gallon) since 1995
• Although both the above regressions have statistical significance based on their R2
coefficients, the uncertainty and volatility of oil prices play a major role in calculating the
cost of cars, so we have incorporated two additional gasoline price scenarios. By
observing how these alternative scenarios affect the results, we are able to account for our
model’s sensitivity to gasoline prices.
v) Linear nature of technology –
• Our model assumes the improvement of technology over time to be linear. This cost-
benefit analysis model does not need or want to make any judgments on whether
technology displays increasing or decreasing returns to scale, nor to spur a philosophical
debate (e.g. feasibility of technological singularity).
• Given the short timeframe of 14 years, applying a linear model is not unreasonable even
if technology is forever exponential in return.
• The first technological assumption is the decrease in manufacturing and maintenance
costs. We can analyze this via the initial price of the car, since firms use the projections
of both costs to determine price. It is worthwhile to note that currently, maintenance
24
costs, particularly for hybrid cars, are included in the car’s warranty as part of the
purchase. The initial purchase price is the first component of the costs associated with
owning a car. Based on the data for gasoline vehicles from year 2000 onwards and
Toyota’s projection of decreasing production costs by over 60% 10 years from now, our
model assumes prices of gasoline cars to fall linearly at 1% annually net of inflation
leading to a total of 5% fall, and the prices of hybrid cars to fall linearly at 2.5% annually
net of inflation leading to a total of 12.5% fall. We have selected these conservative
assumptions, as there is not adequate and sufficiently significant data to estimate how
quickly hybrid cars’ costs will fall. We do not believe this assumption will undermine the
results, because future stream of costs is the main thing at stake. This conservative
assumption will further add to our conclusions.
• The second technological assumption and the second component that factors into the
lifetime cost of the vehicle is the fuel economy – EPA’s MPG, also known as miles per
gallon, of the vehicle. Besides improved gasoline combustion by the engine and
generation of electricity for the hybrid car, the easiest method to increase MPG is to make
the entire vehicle lighter. This is usually done by taking away enhanced features of the
modern car such as comfort and performance. What complicates projections for MPG is
its relationship with oil prices. Taking our Honda Civic as an example, the fuel economy
improved from the upgrade of the 03/05 to the 06/08 models for both the gasoline and
hybrid cars. However, the bust of the oil bubble has actually led to a fall in the average
fuel economy of passenger vehicles. This is obviously not due to technology moving
backwards, but because of lower oil prices, newer cars have been designed with little
25
attention to fuel economy, and often include enhanced features resulting in heavier
vehicles.
Table 1. Fuel Economy of the Honda Civic
Honda Civic EPA’s MPG Gasoline Hybrid
2003-2005 34 47.5
2006-2008 35 50
1 cycle 2.94% 5.26%
2 cycle 5.88% 10.52%
3 cycle 8.82% 15.78%
Averaged over 14 years 0.63% 1.13%
• Table 1 shows the improvement in MPG from every cycle of new model releases.
Disregarding the latest release because of the issue with the bust of the oil bubble
mentioned previously, we will assume that three cycles of upgrades will be available in
the next 14 years. Averaging over 14 years yields 0.63% and 1.13% linear annual
increases in MPG for gasoline and hybrid cars respectively. Historical business cycles
show that it is safe to assume an economic boom to take place after a bust like the one
that we have just experienced, so we can also expect oil prices to increase steadily within
this period of time, substantiating the assumption for an increase in MPG.
6.4 Model & Results
The following outlines the main building blocks of our model and the steps we took to derive the
results:
(1) Gasoline price –
Using the regression trend, y = 0.1004x - 199.45, we obtained the projected gasoline prices from
year 2010 to 2023. Adding in the sensitivity of this variable, we projected two additional cases –
gasoline prices 25% higher and 25% lower than the regression trend’s projection. These
projections yield the results below.
26
Table 2. Gasoline Price Projections
Year 2010 2011 2012 2013 2014 2015 2016
Gasoline prices 1 2.354 2.454
4 2.554
8 2.655
2 2.755
6 2.856 2.956
4
Gasoline prices 1.25
2.9425 3.068
3.1935 3.319
3.4445 3.57
3.6955
Gasoline prices 0.75
1.7655
1.8408
1.9161
1.9914
2.0667 2.142
2.2173
Year 2017 2018 2019 2020 2021 2022 2023
Gasoline prices 1 3.056
8 3.157
2 3.257
6 3.358 3.458
4 3.558
8 3.659
2
Gasoline prices 1.25 3.821
3.9465 4.072
4.1975 4.323
4.4485 4.574
Gasoline prices 0.75
2.2926
2.3679
2.4432
2.5185
2.5938
2.6691
2.7444
(2) Purchase price of car –
Applying the assumptions (v) of the annual price decreases of the cars, 1% and 2.5% for Honda
Civics’ gasoline and hybrid versions respectively yields the following projections for the price of
the cars in the next 5 years.
Table 3. Purchase price projections
Year 2010 2011 2012 2013 2014
Gasoline $ 16455 16290 16125 15961 15796
Hybrid $ 23800 23205 22610 22015 19813
(3) Fuel economy of car –
Similarly, applying the MPG assumptions which projects annual increases in MPG of 0.63% and
1.13% for Honda Civics’ gasoline and hybrid version in the next 14 years, we obtain the
following projections absolute increases in MPG.
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Table 4. Fuel economy projections (MPG)
Year 2010 2011 2012 2013 2014 2015 2016
Gasoline MPG 29.000 29.182 29.365 29.548 29.730 29.913 30.096
Hybrid MPG 42.000 42.462 42.924 43.386 43.848 44.31 44.772
Year 2017 2018 2019 2020 2021 2022 2023
Gasoline MPG 30.278 30.461 30.644 30.820 31.009 31.192 31.375
Hybrid MPG 45.234 45.696 46.158 46.620 47.082 47.544 48.006
(4) Cost of gas –
With the projected MPG, we first calculated the projected annual cost of gas by applying the data
from the assumptions and projections into the following equation.
Miles
MPGGasPr ice ; Miles = 13500
Applying this equation to every year from 2010 to 2023, we obtain the cost of gas per year with
the two additional scenarios – 25% above and below projected gas prices – for sensitivity
analysis.
Table 5. Gasoline cost scenarios
Year 2010 2011 2012 2013 2014 2015 2016
Gasoline Gas Cost 1095 1135 1174 1213 1251 1288 1326
Hybrid Gas Cost 756 780 803 826 848 870 891
Gasoline +25% 1369 1419 1468 1516 1564 1611 1657
Hybrid +25% 945 975 1004 1032 1060 1087 1114
Gasoline -25% 821 851 880 909 938 966 994
Hybrid -25% 567 585 603 620 636 653 669
Year 2017 2018 2019 2020 2021 2022 2023
Gasoline Gas Cost 1363 1399 1435 1471 1506 1540 1574
Hybrid Gas Cost 912 933 953 972 992 1011 1029
Gasoline +25% 1704 1749 1794 1838 1882 1925 1968
Hybrid +25% 1140 1166 1191 1215 1240 1263 1286
Gasoline -25% 1022 1049 1076 1103 1129 1155 1181
Hybrid -25% 684 700 715 729 744 758 772
Using these cost projections, we discount each year’s cost of gas to obtain the present value of
costs by the following equation.
28
Cost1(1+ DiscountRate)1
+Cost2
(1+ DiscountRate)2+ ...+
Cost10(1+ DiscountRate)10
; Discount Rate = 7%
Using the above equation, we obtain the total costs of gas for individuals purchasing cars in the
next 5 years.
Table 6. Discounted gasoline price scenarios
Year 2010 2011 2012 2013 2014
Gasoline Gas Total Cost 9374 9658 9938 10214 10488
Hybrid Gas Total Cost 6353 6517 6678 6835 6989
Gasoline Total +25% 11717 12072 12422 12768 13110
Hybrid Total +25% 7941 8146 8347 8544 8736
Gasoline Total -25% 7030 7243 7453 7661 7866
Hybrid Total -25% 4765 4888 5008 5126 5242
(5) Real cost of car = purchase price + total cost of gasoline:
Table 7. Real cost of cars
Year 2010 2011 2012 2013 2014
Gasoline Gas Real Cost 25829 25948 26063 26176 26284
Hybrid Gas Real Cost 30153 29722 29288 28850 26803
Gasoline Real +25% 28172 28362 28548 28729 28906
Hybrid Real +25% 31741 31351 30957 30559 28550
Gasoline Real -25% 23485 23534 23579 23622 23663
Hybrid Real -25% 28565 28093 27618 27141 25055
(6) Final results –
Recall the setup of this cost-benefit analysis,
• With (hybrid) versus without (gasoline) => New state (hybrid) versus original state (gasoline)
• Goal – Minimize cost => Cost of new state < Cost of original state => (Cost of original state) - (Cost of new state) > 0 => (Cost of gasoline) - (Cost of hybrid) > 0
• Calculate – Net = (CG) – (CH) We find the net by subtracting the real cost of gasoline cars by the real cost of hybrid cars.
29
Table 8. Net costs of purchasing a hybrid car instead of a gasoline car
2010 2011 2012 2013 2014
Net 1 -4324 -3774 -3224 -2674 -518
Net +25% -3569 -2989 -2409 -1830 356
Net -25% -5079 -4559 -4039 -3519 -1393
7. Conclusion
Our results show that it is likely that after 5 years, using hybrid vehicles should be
cheaper in effect and yield a positive net benefit to society. In other words, the salesman who
touts the economic advantages of hybrid cars is incorrect. This is true in all three of our gasoline
price scenarios (baseline, high and low), though the results are sensitive to gas prices, as the
price differential is smallest in the high-price scenario. However, even if oil prices do not
increase dramatically, there is strong economic argument to support the investment and
consumption of hybrid cars.
Under our baseline gas price scenario, for a car purchased in 2010, the total lifetime costs
of the hybrid are about $4,324 higher than those of the gasoline car. For a car purchased in 2014
the differential is $4,200, in 2012 $4,080, in 2013 $3,960, and in 2014 $3,840.
However, it is evident that going forward, the decrease in cost of production for hybrid
vehicles and increasing oil prices will close the gap. Our results show that it is likely that after 5
years, using hybrid vehicles should be cheaper in effect yielding positive net benefit to society.
It is important to note that our analysis only takes into account the price of the car to the
consumer. These costs do not represent the total cost of the car to society. There are a number of
externalities that could significantly impact the total social cost of the car. These externalities can
be divided into four categories: environmental, industrial, R&D and other social externalities.
We have already addressed some of the negative environmental externalities of the production of
batteries for HEVs (see Section 3). The negative environmental externalities of gasoline cars
30
include particulate matter and greenhouse gas emissions and foreign oil dependence. Particulate
matter air pollution has been linked to a number of negative health impacts, including asthma,
chronic respiratory illness, heart attacks and premature mortality. Treating these illnesses
imposes large health costs on society, and these costs are even higher if the value of life is taken
into account.21 Additionally, passenger vehicles are responsible for 26.5% of U.S. greenhouse
gas emissions; though the cost of carbon emission is difficult to quantify, the cap and trade
system that has been proposed in the recent climate bills in Congress would place a definite per-
unit price on CO2 emission.22
We have also briefly addressed the externalities of an increase in hybrid production on
other industries (see section 3). An increase in lithium demand for the production of Li-ion
batteries could result in a power shift in international trade, as the countries with large deposits
of lithium are not the same countries which currently possess important natural resources.
Additionally, increased reliance on HEVs would decrease the importance of the oil industry in
the global market. Reduced U.S. dependence on foreign oil from Canada and especially the
Persian Gulf would allow the U.S. to withdraw much of its military protection that it has been
maintaining despite high costs. Withdrawing from the Persian Gulf region would diminish
diminishes the rising political tension that the U.S., China and Saudi Arabia have been fostering
over the region's oil market. Decreased U.S. dependence on Saudi Arabian oil would
consequently improve the U.S.’s relations with China.
There are other externalities associated with hybrid car production and development that
are harder to quantify. For one, there are the research and development costs that go into
producing advanced batteries. However, these costs need not be included in an accounting of the
21 Abt Associates. 2004. 22 U.S. DOT 2009, Table 4-9, U.S. EPA Report No. 420-F-05-001, and U.S. DOE Report No. #: DOE/EIA-057.
31
cost of a hybrid vehicle, as R&D costs are sunk costs. It would be unreasonable to attempt to
include all the costs of technology development reaching back to Henry Ford, and similarly it is
not necessary to account for more recent R&D costs. Another externality is the psychological
“feel-good” benefit that consumers may derive from driving a hybrid car that is “greener” than a
traditional gasoline car. Driving a hybrid car instead of a gasoline car also imposes a positive
externality of time saved, since less time would be spent at the gas pump, refueling the car.
Given the positive externalities of driving hybrid cars and the negative externalities of
driving gasoline cars, it seems reasonable that the government should work to support the
adoption of hybrid cars. The Department of Energy’s Vehicle Technologies Program does this,
to an extent; given volatile gas prices and the possibility of a carbon price, it is possible that in
the future we will see more aggressive promotion.
Hybrid-electric passenger vehicles are poised to impact U.S. markets in a significant way.
HEVs have the potential to increase America’s energy independence by reducing U.S. foreign oil
dependence, as well as significantly decrease greenhouse gas emissions and consequently
mitigate global climate change. Battery technology is one of the largest obstacles in the
deployment of HEVs. The resources required to produce batteries could shift the global power
structure, and the recycling of these batteries is another issue that is largely unregulated.
Technological limitations tend to render batteries prohibitively expensive, increasing price of a
hybrid vehicle over a comparable gasoline-powered vehicle. However, joint government-
industry research efforts into methods of reducing these battery costs and improving battery
technology show great promise. Though costs to the consumer will be higher over the next five
years for gasoline cars than for hybrid cars, hybrid gars will soon break even with gasoline cars,
32
spurring greater market penetration by HEVs and further incentivizing advanced battery
research.
33
Appendix A: Economic Model
34
Appendix B: Nominal Parameters for 1 Amphour Secondary Batteries Lead Acid
Specific Energy 20-35 Wh/kg
Energy Density 54-95 Wh/L
Specific Power ~250 W/kg
Nominal Cell Voltage 2 V
Internal Resistance ~.022 per cell
Self-Discharge ~2% a day
Recharge Time 8h (90% in 1h possible)
Nickel Metal Hydride
Specific Energy ~65 Wh/kg
Energy Density ~150 Wh/L
Specific Power 200 W/kg
Nominal Cell Voltage 1.2 V
Internal Resistance ~.06 per cell
Self-Discharge ~5% a day
Recharge Time 1h (60% in 20min possible)
Lithium Ion
Specific Energy 90 Wh/kg
Energy Density 153 Wh/L
Specific Power 300 W/kg
Nominal Cell Voltage 3.5 V
Internal Resistance ~.2 per cell
Self-Discharge ~10% a month
Recharge Time 2-3h Larminie (2003)
35
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